As one of the main architect's of the Clinton economy, it's vitally important to review Robert Rubin's work in order to understand what can be done in the future. In short, Rubin's policies worked. It's that simple.

First, let's start with the balanced budget, which was part of Clinton's plan from the beginning of his Presidency.

The following is from On the Edge, by Elizabeth Drew, page 60:

Following the election [during the transition], Clinton realized there was little he could do about raising spending for his investments if he didn't tackle the deficit.....He [Clinton] gradually came to see that the debt posed a threat to what he wanted to do to spur competitiveness and economic growth, as well as to revive the economy, and was using up capital that could otherwise go to public and private investment.

(from page 73)The result was an economic program that was bold by conventional standards and did seek to reverse Reagonomics and redirect the country's economic resources from consumption to longer-term investment, and at the same time to take a major bite out of the federal budget deficit. Clinton proposed deficit cuts of $493 billion over 5 years; increased spending, most of it on longer term investments such as job training, rebuilding the nation's infrastructure, education, and promoting high-tech tax increases of $246 billion over five years; and net cuts in federal spending of $247 billion.

Clinton's economic team of Robert Rubin, Lloyd Bentson (RIP), Leon Panetta and Alice Rivlin were all deficit hawks. All continually argued for a balanced budget. ;They won. Clinton came to realize the importance of balanced budgets.

But, why is a balanced federal budget so important?

It prevents crowding out. This is a fancy way of saying money that would finance the federal budget deficit is instead invested in private capital. Let me use the current situation as an example. According to the Congressional Budget Office, the US had a $318 billion budget deficit in 2005. That means $318 billion dollars was not invested in the private economy, but instead invested in US government bonds. The larger the deficit, the less money available for private investment.

Psychology and uncertainty. A budget deficit detracts from individual's confidence in the market and the overall economy. As individual's look to the federal deficit, they understand that at some time the government must pay back the money it borrows. That means the government will probably have to either raise taxes (more likely) or decrease spending (far less likely whichever party is in control of the government). ;Deficits create psychological uncertainty. The larger and more persistent the deficit, the less happy people are and the less prone they are to take economic risks.

Interest rates. The government is the largest borrower in the credit markets. The treasury market is the base interest rate for other credit market borrowers. If the government has to increase the amount of debt it issues, it has to ask for a higher interest rate. The reason is simple supply and demand. When you sell more of a good, you usually have to drop the price (price and yield are inversely related). Therefore, if the government issues more debt, it has to ask for a lower price and higher yield. The inverse is also true. Lower interest rates helps anybody who wants to borrow money because they will borrow at a rate based on the US Treasury curve.

Let's coordinate three sets of data to illustrate the point. According to the Congressional Budget Office, the deficits/surpluses for years 1993-2000 were (respectively and in billions) $-255, -$203, -$164, -$21, +$69, +$125, +$236, +$128. So, the budget deficit continually decreased from 1993-1996, the budget surplus increased from 97-99 and the budget showed a surplus in 2000 although this was lower than the preceding year. In other words, the record indicates a clear path towards balancing the federal budget. This was not the result of a happy accident - it was deliberate.

One of the prime reasons why the 1990s economy was so successful is the incredible amount of confidence this gave private investors. They could look at Washington with confidence, knowing politicians managed national finances were maturity. There was no talk to the deficit - was it too high, could it be maintained at current levels, will they ever get around to fixing it etc..... Simply put, investors had a sense of certainty and confidence about the economy. This encouraged them to take risks which helped everybody.

Jobs

From an overall jobs perspective, the Clinton team created 22,759,000 from January 1993 to December 2000. This breaks down to 2.8 million jobs/year. The labor participation rate increased from 66.2% in January 1993 to 67% in December 2000. The unemployment rate decreased from 7.7% in January 1993 to 3.9% in December 2000.

The Clinton team was focused in opening up new avenues of job creation that would benefit the middle class. Previously, manufacturing was the primary economic sector the helped the middle class. Total employment in this area increased from 16,790,000 in January 1993 to 17,181,000 or an overall increase of 391,000. This isn't bad, but it certainly could be better (Under Bush, the manufacturing sector has lost 2.8 million jobs). However, the Clinton team's focus on high-tech provided new avenues of wealth creation. Total information jobs increased from 2,656,000 in January 1993 to 3,706,000 in December 2000, or an increase of 1,050,000 million (Under Bush, information services have lost 560,000 jobs).

In addition to the beneficial effects of balancing the budget, Clinton's economy was geared toward helping the middle class attain a better life. According to the Bureau of Labor Statistics, the hourly pay for non-supervisory workers increased from $10.63 in January of 1993 to $14.26 in December 2000 for an increase of 34.14%. Over the same period, the inflation measure increased from 138.1 to 174 for an increase of 25.99%. Therefore, the inflation adjusted hourly wage increased 8.15%.

Looking deeper in the data provided by the Federal Reserve's Survey of Consumer Finances for 1998, the change is apparent:

In the 1998 survey, inflation-adjusted mean and median family incomes continued the upward trend between the 1992 and 1995 surveys; they also surpassed the levels observed in the 1989 survey toward the end of the previous expansion....

From 1995 to 1998, the proportion of families with incomes of $50,000 or more rose from one-fifth to 33.8%, while the proportion with incomes below $10,000 fell about one-sixth to 12.6%.

And from the 2001 survey:

Between 1998 and 2001, inflation-adjusted family incomes rose notably faster than they did in the 1995-98 period. The median rose 9.6% percent (2.5 percent during the 1995-98 period) and the mean rose 17.4% (12.2 during the 1995-98 period).

Compare this to the 2004 survey:

The survey shows that, over the 2001-04 period, the median value of real (inflation-adjusted) family income before taxes continued to trend up, rising 1.6%, whereas the mean value fell 2.3 percent....These results stand in contrast to the strong and broad gains seen for the period 1998 and 2001 surveys and to the smaller but similarly broad gains between the 1995 and 1998 surveys.

Under Clinton, the median family income increased from 27,900 in 1992 to 32.7 thousand in 1995, 33,400 in 1998 and 39,900 in 2001. Over the same period inflation increased 28%, making the total inflation adjusted gain 15%. Average income increased from $44,000 in 1992, to $47,500 in 1995, to $53,100 in 1998 to $68,000 in 2001 for an inflation adjusted increase of 23%.

Conclusion

The answer to the current situation of weak jobs and wage growth and runaway spending is straightforward.

1.)Balance the budget. This will require repealing some of the rich's tax breaks. My heart bleeds.

2.)Target economic areas that will create jobs. I would personally target alternative energy, nano technology and stem cell research, although there are many others.

3.)Give the middle class -- and only the middle class -- a tax break.

All we have to do is follow the directions.

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